A Proposal for Direct Lending to Qualified Troubled Borrowers

With each passing release of housing-related data, the picture becomes bleaker for the estimated 1.8 million homeowners with subprime mortgages whose interest rates have reset this year or are due to reset before the end of next year. Many of these borrowers and their families hold the 22 percent of adjustable rate subprime loans currently delinquent or the 3.84 percent of subprime loans that entered foreclosure in the second quarter of this year. For those still current on their loans, they can look forward to increases in monthly payments averaging 30 percent to 50 percent when their rates reset.

There have been a number of proposals offered to help these and other troubled borrowers, but the range of solutions suggested to date still leaves a significant number of families without any solution to their problems. This paper will focus on solutions for those borrowers who have the wherewithal to make reasonable mortgage payments but lack enough equity in their homes to refinance because the value of their homes are “underwater,” or worth less than the value of their mortgages.

To understand which distressed homeowners would qualify for which type of mortgage relief, this paper divides borrowers into broad categories in order to demonstrate where a solution for each set of homeowners may be found. For some borrowers, recent initiatives—FHASecure and a proposed rate-freeze agreement—offer workable solutions. The Bush administration estimates that up to 600,000 borrowers would be eligible for FHASecure or a rate freeze, but many analysts estimate the maximum number to be half that. Other borrowers with the best credit and positive home equity can turn to Fannie Mae and Freddie Mac and the private sector to refinance.

Then there is a final group of homeowners who would be aided by our proposed Family Foreclosure Rescue Corporation, which we will detail in this paper. See the table below for an illustration of the various mortgage relief programs and how they would work for different types of borrowers.

We would be remiss, however, if we did not first acknowledge that there remains a sizeable number of borrowers who were explicitly or implicitly steered into loans they would never have any hope of repaying. For the time being, we must work carefully and compassionately to help them transition back into rental housing.

The Center for American Progress intends to address this group’s particular needs in future work. For all borrowers at risk of default or facing foreclosure, housing counseling offered by counselors approved by the Department of Housing and Urban Development, such as NeighborWorks and their partners, often is the conduit directing borrowers to their servicers for help during the foreclosure process.